How to weigh up the different types of financial instruments on offer

Julie Brownlee, Fsp Invest, 28 Aug. 2015

Tags: financial instrument, financial instruments, risk of financial instruments, returns of financial instruments, investing,

If you want to get your money working harder for you, then you’re going to have to make some decisions.

By investing in different financial instruments, you can increase the returns your money gets from sitting in the bank.

So what are your choices? And what are the risks involved with each type of financial instrument?

Let’s take a closer look at six different financial instruments…

Financial instrument #1: Cash

The risk with our first financial instrument, cash, is low, but with that comes a poor return. You’re likely to see a return less than inflation.

Holding large sums in cash isn’t a wise idea, but it’s prudent to hold enough money to tide you over for any emergencies.

Financial instrument #2: Bonds

The risk with bonds is also low. You’re looking at returns of 2% above inflation.

Bond are a good investment for income, but not for capital growth.

Financial instrument #3: Unit trusts

The risk with unit trusts is low to medium, depending on the fund you invest in. The returns you’ll see relate to the performance of the stock market.

Investing in unit trusts is a good way to invest regularly on a month basis. And if the stock market is doing well, your returns should do too.

Financial instrument #4: Penny stocks and small-cap shares

The risk with penny stocks and small-cap shares is medium to high. There is the potential for high returns if you get your picks right.

Penny stocks and small-cap are a good idea to include in a well balanced portfolio.

Financial instrument #5: Mid- to large-cap shares

The risk with mid- to large-cap shares is medium. There is the potential for solid growth and income from dividends.

It’s a good idea to include a diversified selection of mid- and large-cap stocks in your portfolio.

Financial instrument #6: Single stocks futures and other derivatives

The risk with single stock futures and other derivatives like contracts for difference (CFDs) is high.

The potential returns are high too, but you risk losing more than you initially put down. This isn’t the case for any of the financial instruments listed above.

So there you have it. How to weigh up the financial instruments on offer.

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